Cloud is hot, but this IPO is pure insanity

Nigam Arora is an engineer, nuclear physicist, author, and entrepreneur and
the founder of two Inc. 500 fastest growing companies. He is also the developer
of the ZYX Change Method
to profit from change by investing. The premise is that most money is made by
predicting change before the crowd. Arora is the chief investment officer at
The Arora Report and the
editor of four newsletters that track the ZYX Change Method. Nigam can be
reached at Nigam@TheAroraReport.com.

Cloud computing is hot. Even lay consumers who hadn’t heard of it only a year ago, not only know about cloud, but now they use it every day.

If you are an Apple
AAPL, -0.87%
iPhone user, you are probably using iCloud. If you are a Google
GOOG, -1.10%
Android user and using voice recognition, you are connecting to cloud. If you are using Microsoft
MSFT, -0.38%
Office, you are probably connecting to SkyDrive, which in essence is allowing you to work in the cloud.

Cloud computing simply means use of remote hardware and software over a network such as the Internet. The name cloud originates from a cloud shaped symbol to represent the system diagram of cloud computing.

Cloud computing provides economies of scale similar to a power utility that produces power at a central generating station and delivers electricity to customers via a grid.

Both consumers and enterprises like cloud computing because it allows them to access their applications and data through low-powered devices such as mobile phones and tablets from anywhere with Internet access. In other words, you aren't restricted to your computer.

The hot new IPO is Workday
WDAY, +0.69%
The IPO was priced at $28 and, as of this writing, was trading at $55.41.

Even at $28, Workday was an expensive stock. We recommended it to our subscribers to buy it in the IPO with the intention of flipping it. Due to the enthusiasm for this cloud IPO and the planned short duration of holding, the rich valuation didn't present much of an obstacle.

We recommended selling the IPO at the first print in the aftermarket. Our subscribers sold at $48.05. Now, at $55.41, the valuation is insane.

When taking into account not only the shares outstanding but also the options, $55 implies a value of about $10 billion.

Workday had revenues of $134.4 million in the fiscal year ending January 2012. In the six month period to July 2012, revenues were $119.5 million. If this rate continues, the company is growing at about 100%. Does this fast growth justify $10 billion valuation? The company isn't profitable and is trading at forward price/sales ratio of about 35.

Workday provides software as a service for human capital management, procurement, and financial management. The founders of the company are Aneel Bhusri and Dave Duffield. These two founders come from PeopleSoft, which grew to become the world's second largest Enterprise Resource Planning (ERP) software company. The company was acquired by Oracle
ORCL, +0.73%
in 2005.

There is also the cache that companies similar to Workday have been acquired by the likes of Oracle, SAP
SAP, +0.04%
and IBM
IBM, +0.64%
Imagine Apple trading at 35 times forward Price/Sales; Apple would be trading at about $6,700 per share.

Certainly comparing Workday to Apple is like comparing apples to oranges.

However, a comparison to Salesforce.com
CRM, -0.08%
is appropriate. Workday is about 500% more expensive than Salesforce.com, which is a premier cloud based company that provides customer relationship management software.

Investors cannot be blamed for wanting to invest in the hot area of technology, but there are many, many better ways to invest than Workday. This is especially true for those investors whose focus is generating high risk adjusted returns, i.e., like our focus at The Arora Report.

Disclosure: The Arora Report recommended for subscribers to buy Workday in the IPO. The IPO occurred at $28. The recommendation was made to sell on the first print which occurred at $48.05. Subscribers to The Arora Report are also long Apple from $131.

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